Flagstar Bancorp Turns to Subservicing to Boost Profits

Flagstar Bank wants to become a bigger subservicer for performing residential mortgages and nearly triple the size of its mortgage servicing shop, a top executive said this week.

"Today we are servicing 370,000 loans. We would like to build that up to 1 million loans," said Lee Smith, the bank's chief operating officer, in a presentation at a Keefe, Bruyette & Woods conference on Tuesday.

Smith said that Flagstar is selling mortgage servicing rights of its own originations to investors like Two Harbors Investment Corp. and subservicing the loans.

As an originator, "we create MSRs daily and we are a big seller. In the fourth quarter, we sold $54 billion in MSRs—$41 billion was to Two Harbors—and we subservice all of the loans underlying that deal," Smith said.

That is one way Flagstar is growing its subservicing portfolio. Smith stressed that the Troy, Mich.-based federal savings bank is "very plugged" into the network of financial firms that buy MSRs.

"When they are buying MSRs, we can still subservice those loans," he said.

In addition, Fannie Mae and Freddie Mac need subservicers, he said.

Flagstar currently subservices 195,450 loans for others with an unpaid principal balance of $39.5 billion.

It also services 146,340 loans ($29 billion in unpaid balances) that were sold to Fannie, Freddie and Ginnie Mae where the bank retained the servicing. In addition, the bank services 28,000 loans ($4.5 billion in unpaid balances) for its investment portfolio.

According to National Mortgage News statistics, Flagstar ranked as the ninth largest subservicer and the 17th largest mortgage servicer in the fourth quarter of 2013.

Flagstar executives stressed that mortgage originations will continue to be their primary driver of revenues. The federal savings bank originated $38 billion in residential first and second loans in 2013 and $4.8 billion in the first quarter of 2014.

But Smith noted they are "pretty excited" about growing the servicing portfolio, which will be predominately subservicing. For every 100,000 loans added to "our book, it adds between $5 million to $7 million in operating profit," the COO said.

On April 22, the bank's parent, Flagstar Bancorp, reported a net loss of $78.9 million in the first quarter, compared to a loss of $160.5 million in the prior quarter.